New York Times - 17 Aug 01

Reckonings; Enron Goes Overboard

By PAUL KRUGMAN
Published: August 17, 2001

Whom the gods would destroy, they first put on the
cover of Business Week. When the Feb. 12 issue featured a cover photo of
Jeffrey Skilling, you knew bad things were about to happen both to Enron
and to its new C.E.O. Sure enough, on Tuesday Mr. Skilling resigned for
"personal reasons." The next day he conceded that the most important
of those personal reasons was the 50 percent drop in Enron's stock since
January.

Is this just another tale of extravagant expectations
disappointed, the kind of story that has become all too common lately?
No; this case has wider significance. Enron, based in Houston, is in the
vanguard of a powerful movement that hopes to "financialize" (Enron's
term) just about everything -- that is, trade almost everything as if it
were stock options.

That movement is as much about politics as it is
about business, and the company has not been shy about using its
political connections to advance its cause. With the arrival of George
W. Bush in the White House -- thanks largely to Enron, a prime mover
behind his campaign -- the sky seemed to be the limit.

But financialization looks more and more like a
movement that has overreached itself.

Enron was originally a natural gas pipeline company,
swaddled like all such companies in a tight regulatory straitjacket. In
the mid-1980's, however, gas markets were set free. And Kenneth Lay, who
was C.E.O. at the time and is returning to succeed Mr. Skilling, saw a
great opportunity.

He transformed Enron from a company that delivered
B.T.U.'s to one that dealt in contracts; as Business Week put it, the
company became "more akin to Goldman Sachs than to Consolidated
Edison." Enron became the lead market-maker for the new, deregulated
natural gas industry; since deregulation worked well for natural gas,
which increasingly became the nation's fuel of choice, Enron's new role
was highly profitable.

After gas, electricity. As power deregulation became
the rage across the U.S., Enron took on a key role as a broker for
wholesale electricity. Soon the company was looking for new worlds to
conquer: water supply, bandwidth on fiber-optic cables, data storage,
even advertising space.

Then things started to go wrong. Enron abandoned its
venture into water supply when it became clear that governments were
reluctant to entrust so crucial a matter to the magic of the invisible
hand. And skeptics found ample justification for their lack of faith
when electricity deregulation, which was supposed to be a certified
success story, went spectacularly astray in California.

True believers insist that the power crisis of
2000-2001, which transferred tens of billions of dollars from taxpayers
to electricity-generating companies -- and quite a bit to Enron too --
was not a verdict on deregulation, that it was all the fault of meddling
politicians who didn't let the market work. But this claim isn't
particularly convincing, mainly because it isn't true. The real lesson
of the California catastrophe was that the concerns that led to
regulation in the first place -- monopoly power and the threat of market
manipulation -- are still real issues today.

State and local governments, alerted by what happened
in California, will henceforth be a lot more wary about deregulation.
There's even a movement to reregulate electricity markets. And that
means fewer opportunities for Enron, whose stock price depends on the
expectation that it will keep finding new Californias to conquer.

Of course, the people Enron put in the White House
are still there, and they seem to have learned nothing from California.
It's true that the Bush administration sometimes compromises on its
free-market principles -- it believes, for example, that energy
producers need huge subsidies, even though the shortages those subsidies
were supposed to correct have turned out to be imaginary (a recent cover
story in Barron's warned of "the coming energy glut").

But otherwise the administration's faith in
absolutely unregulated markets is unshaken. The new head of the Federal
Energy Regulatory Commission -- the watchdog agency that conspicuously
refused to do its job in California -- is, you guessed it, a Texan with
close ties to the energy industry. And the administration continues to
believe that "financialization" is the way to go on just about
everything, from school vouchers to Social Security.

But it's wrong. And let's hope that it doesn't take a
string of catastrophes to teach us that there are limits to what markets
can do.